Can't save, won't save

In discussions of the current economic woes in the U.S., the dismal savings rate is a topic that frequently comes up, with virtually every commentator agreeing that this must be raised in order to begin to correct the problem. David Leonhardt, in his must-read NYT Magazinearticle about Obama’s economic ideology this weekend, explains the problem succinctly.

For the first time on record, an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation, than they were in 2000. For these workers, roughly the bottom 60 percent of the income ladder, economic growth has become a theoretical concept rather than the wellspring of better medical care, a new car, a nicer house — a better life than their parents had.
Americans have still been buying such things, but they have been doing so with debt. A big chunk of that debt will never be repaid, which is the most basic explanation for the financial crisis. Even after the crisis has passed, the larger problem of income stagnation will remain.

In order to minimize that unpaid chunk of dent—and minimize the damage—increased savings over time must be used to pay that debt down. (At a macro level, too, increased savings will mitigate trade imbalances, stabilize the dollar, and reduce our reliance on foreign banks to fund our borrowing.)

But with the stagnating wages comes a greater reluctance to save and a loss of faith in the traditional “work a lot, save a lot” method to wealth. Instead, people rightly conclude that they will continue to fall behind without supplementing their wages with another form of income. Some try lottery tickets, others apparently try the upscale equivalent—short-term investing. Felix Salmon takes note of a survey about American attitudes to saving.

Here’s a depressing statistic. In a recent Harris survey, 3,866 Americans were asked which things were “extremely important to achieving financial security in your retirement”. 39% said that “investing wisely” was extremely important, while just 34% said that saving money during one’s working years was.
The problem is that while the financial-services industry is very good at marketing and selling investment products, it’s very bad at marketing and selling thrift, and living within one’s means. After all, the only thing which is marketed more aggressively than investments is credit products.

It’s not merely the fault of the marketing departments in the financial services industry, though. It’s the fault of marketing, period. Advertising works hard to undermine the ethic of saving, making acquiring more goods seem all important and making our faltering wages seem even more inadequate. This works hand in hand, then, with ads touting more credit products. There is virtually no commercial incentive to encourage thrift; that’s not where the fat margins are. And prioritizing not having stuff is unlikely to become anything but an alternative lifestyle—a marginal mode of bourgeois rebellion—any time soon. Our sense of self is too bound up with what we possess and display; expecting people to consume and acquire less is almost tantamount to asking them to become less of a person.

That’s why the government must do what it can to encourage thrift—mandating an opt-out standard for participation in 401k’s for example. But what mainly needs to change is the sense of unfairness that permeates the economy, something that shows up in the class divide between those who earn income through wages and those who earn it through investments. The consensus seems to be this: Working and saving are noble goals, but consuming is what gets people’s attention and pins down the sorts of things we are committed to (putting our money where our mouth is). And working is sort of for suckers; having your money work for you is where it is at. Wage earners thought buying houses would make their money work for them—the house magically doubled their money as property values irrationally increased (creating knock-on wealth effects and encouraging increased consumption). But now that it has become clear that buying houses is simply more consumption, and not investment, the shortfall in national savings is easily recognized as an abyss.